An energy efficient mortgage (EEM) is a type of loan that encourages borrowers to reduce their energy expenses by financing the cost of energy-efficient upgrades. Borrowers can apply for an EEM when making a new housing purchase or when refinancing an existing house. Energy efficient mortgages are federally recognized, easy to use, and can be applied to most types of home mortgages. The use of an EEM means more money in the pocket of borrowers each month due to lower utility bills. Learn more about energy efficient mortgages and how Fairfax Mortgage Brokers can help you secure a loan.
How Energy Efficient Mortgages Work
If you interested in an older home that needs work or have an existing home that is outdated, you may be considering how to pay for these changes. An energy efficient mortgage is an effective way to make updates to a home as the EEM may cover the costs. Also known as a “green mortgage” or “energy improvement mortgage,” an energy efficient mortgages allow borrowers to qualify for a larger loan amount than they would otherwise qualify for as the lender factors in the additional expense of energy efficient improvements.
Similar to a traditional home mortgage, an EEM requires the borrower to pay a monthly payment to the lender. As the EEM is considered part of the home loan, only one payment is made per month. This differs from unsecured energy efficiency loans which are paid separate from a home mortgage loan. However, an EEM differs from other unsecured energy efficiency loans as the lender requires you to put your home up as collateral. When your home is put up as collateral, it is less risky for lenders than with other financing options. This can lead to lower interest rates for the borrower.
As with a traditional home mortgage, the interest on an energy efficient mortgage is tax deductible. This can result in substantial tax savings for borrowers in the long-term when compared to unsecured energy efficiency loans. It is important to note that while energy efficient mortgages can provide borrowers with a wide range of benefits, there are a few downfalls to consider. One of the biggest inconveniences related to EEMs include the time-consuming application process. Approval for an EEM requires a home energy audit. You may also need to meet other qualifications.
Energy efficient mortgages can be used to make a number of energy efficient upgrades, such as:
- Solar water heaters
- Clock thermostats
- Weather-stripping and caulking
- Water heater insulation
- Vapor barriers
- Heat pumps
- Solar cooling and heating systems
- Ceiling, wall, attic, and floor insulation
- Storm or thermal windows and doors
- Furnace efficiency modifications
Qualifying for an Energy Efficient Mortgage
When applying for an energy efficient mortgage, one of the main things a lender will look for is whether or not the upgrades you plan to make will be cost-effective. To determine the cost-effectiveness of the upgrades, most lenders use a metric known as the home energy rating score (HERS). This metric can help evaluate how much you can realistically add onto your mortgage for energy efficient upgrades. The lender will also take into consideration the score that you are given by a qualified auditor after performing an energy audit. During an energy audit, the auditor will inspect the energy systems in your home, such as the heating and cooling systems.
After performing an energy audit, the auditor will make recommendations in his or her report for specific projects. The report should include the estimated costs to make the upgrades, what savings the upgrades would provide, the amount of time it would take to make the improvements, and similar information. Using this report, the lender will decide how much additional money to let you borrow for energy efficient projects outside of the home cost. If you plan to purchase a new home, you will also need to qualify for a home mortgage.
Benefits of Energy Efficient Mortgages
- Lower monthly energy expenses
- Maximize indoor air quality and the health of occupants
- Protect the environment by reducing greenhouse emissions
- Improve the resale value of your home
- Maintain an energy-efficient Energy Star label
Contact Fairfax Mortgage Brokers
Although an energy efficient mortgage can be useful in a number of circumstances, it is not right for everyone. An EEM may be right for you if you are comfortable using your home as collateral and have adequate home equity to cover the costs of your projects. You should also have enough tax liability to maximize tax-deductible interest. Also know that it may take several weeks for the loan to close. If you are okay with these terms, an EEM could help you get the energy efficient upgrades you need for your home. For more information about energy efficient mortgages or how to apply for a loan, contact the professionals at Fairfax Mortgage Brokers.